Amazon Stock Jumps as Analysts See Grocery Expansion Supports Share Gains

Amazon shares jumped 2.1% in morning trading.

Amazon is expanding its grocery selection to Amazon.com and is effectively lowering the cost of delivery and minimum basket size in latest efforts to drive more of the $1.5T offline grocery opportunity, Morgan Stanley tells investors in a research note.

The firm, which has an Overweight rating and $300 price target on Amazon shares, believes Amazon has been losing “modest” online grocery share to Walmart, DoorDash, and Uber due to to price, selection, convenience, delivery, and pick-up options, and thinks this category expansion and effective price reduction is an important signal of increased investment to drive durably faster growth.

The grocery opportunity is large, but the extent to which Amazon increases competition could eventually challenge growth or profitability of peers, the firm argues, noting that among all grocers, Walmart has the most demonstrable track record of share gains and that it has been preparing for this risk over the last decade.

After Amazon announced one of its "most significant grocery expansions" by introducing thousands of fresh perishable groceries into its retail network, JPMorgan analyst Doug Anmuth said the firm believes the expansion of same-day delivery on fresh perishable groceries to over 2,300 U.S. cities by the end of the year will drive greater share of wallet, higher purchase frequency and also support Prime pricing power. The analyst, who continues to identify Amazon as his "Best Idea," reiterates an Overweight rating and $265 price target on the shares.

Evercore ISI notes Amazon announced its expansion of Same-Day Delivery service to include perishable groceries marking a significant strategic move into one of retail's most competitive and high-retention categories. The firm believes this deepens Amazon's customer engagement by strengthening a high-frequency purchase category into the Prime ecosystem, increasing stickiness and customer lifetime value. The deeper integration of groceries with Amazon's vast general merchandise offering positions the company more aggressively against competitors like Instacart (CART), Walmart+ (WMT). By setting a relatively low free delivery threshold of $25, Amazon applies pricing pressure that may challenge rivals' ability to compete on convenience and cost. Given that this segment is a $1T-plus market in the U.S. and perhaps $2T-plus across all of Amazon's global markets, there should be a large growth opportunity here, Evercore adds. The firm has an Outperform rating on Amazon with a price target of $280 on the shares.